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It's called the ripple effect and it's well-documented

In a recent study, Arindrajit Dube of the University of Massachusetts-Amherst, Laura Giuliano of the University of Miami, and Jonathan Leonard of the University of California-Berkeley find substantial evidence of a ripple effect in a large U.S. retailers pay policies. In 1996 and 1997, the federal government raised the minimum wage of $4.25 an hour in two steps to $4.75 and $5.15. The authors find that the large retail company, which was promised anonymity in order to provide data for study, raised its wages by 30 to 40 percent across its entire hourly workforce even though only 5 to 10 percent of this national firms employees earned less than the minimum wage.

There are good reasons to expect to see this same kind of ripple effect of raising the minimum wage more broadly in the U.S. labor market. In particular, economic theory suggests that increasing the minimum wage will raise the wages of other workers when employers need to compete for workers, as in some search-and-matching models of the labor market. Imagine all firms occupy rungs on a ladder, ranked by how well they pay their workers. After a minimum wage increase, the lowest paying firms raise their wage to the new minimum. This leads the next rungs of higher-paying firms to raise wages as wellto increase their ability to recruit and retain workers who would have better options elsewhere due to the minimum wage increase. The minimum wage then filters its way up the labor market, with ripple effects declining in influence further up the ladder.

Alternatively, workers may care about how they are paid relative to other workers at in their own workplace. After a minimum wage increase, will a supervisor be content with a wage similar to her now more highly paid staff? To the extent that employees are concerned about relative wages within a business, firms may raise wages in accordance with their institutional norms.

Whether ripple effects are largely market-mediated across firms or are instead based on relative pay concerns within the firm are open questions that get to the heart of wage-setting mechanisms in the labor market. The research by Dube, Giuliano, and Leonard on the large U.S. retailer suggests that within-firm pay concerns may matter a great deal because they affect how employees search for jobs. The retail industry famously boasts a high rate of employee turnover, and the authors find that workers quit their job significantly less often after minimum wage increases. This effect, however, largely occurs through relative pay concerns, such as when a worker receives a pay raise relative to her peers, she is far less likely to quit than if she had not received that relative increase in pay.

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